A conspiracy theory doing the rounds of foreign exchange markets is claiming the world’s leading central banks have shaken hands on a secret deal to end a series of damaging currency wars.
The world’s currency markets are relatively calm as speculators debate whether the world’s central banks are acting like a cartel aimed at bringing down the value of the US dollar.
The idea is that a strong dollar is bad for the US economy and for most other leading economies.
The conspiracy idea started after finance ministers of the G20 countries met in Shanghai, China, recently.
The suggestion is the ministers are orchestrating a delicate balancing act between the value of the US dollar against the euro, Japanese yen, Chinese yuan and Australian dollar as well as many currencies pegged against the value of the Us dollar.
No competitive devaluation
The G20 ministers announced that they would not compete against each other with ‘competitive devaluation’.
The statement was largely ignored as political bluster, but since the meeting, the markets have buoyed.
The US dollar has considerably weakened against most major currencies as central banks in China and Europe stabilised their rates, while Japan decided to stall on further easing. The US Federal Reserve also held back from a further rate increase.
All these measures feed into the conspiracy theory, but no bankers have broken ranks to confirm a deal was done.
The US dollar started the year at $1.48 to the pound, dropped as low as $1.38 in February and has now risen to $1.44.
What is a currency war?
Currency wars are declared when one country’s central bank decides on monetary policy aimed at devaluing the national currency to gain an economic advantage against another.
For instance, Japan has devalued the yen over recent months with a view to making exports cheaper against other Asia Pacific rivals – and to make their imports into Japan more expensive to discourage consumers and business from buying them.
Central banks have made other tacit agreements in the past to work in concert to manipulate currency exchange rates.
The last were in the 1980s – and both were aimed at adjusting the price of the US dollar on the money markets.